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Beyond Dependence: The Power of Supply Chain Diversification

September 4, 2024

Article

Introduction

In today’s globalized market, supply chain diversification has emerged as a vital strategy for businesses. The concept of supply chain diversification involves reducing reliance on a single supply source and tapping into different market opportunities and technologies to enhance competitiveness.

Recent political, health, or environmental events have caused supply disruptions due to a high dependence on a single supplier or regional source. Consider these examples:

The aerospace industry struggles with heavy reliance on materials from adversarial nations, illustrated by a counterfeit titanium incident.
Businesses that relied heavily on grain from Ukraine were cut off from shipments of 20 million tons last year because of a Russian blockade.
The Suez Canal, one of the most important supply chain routes that accounts for 13.5% of the world’s freight transportation, got blocked by the Ever Given supertanker, causing a loss of over $9.6 billion every day in maritime traffic.

These incidents point to the importance of supply chain diversification. This article will review why diversification matters, how it helps businesses, as well as effective strategies for implementation.

Why Supply Chain Diversification Matters

Supply chain disruptions from the COVID-19 pandemic created more awareness of the need for diversification. A McKinsey study found that 73% supply chain leaders found problems in their supply chain footprint during the pandemic that required change.

Diversifying won’t guarantee supply chains will become disruption-proof, but it will help with these factors that emphasize the need for broadening the sources of supply.

Geopolitical Risks

Geopolitical risks are events or trends that have the potential to have a significant impact on global markets and supply chains. These risks can include trade wars, sanctions, political instability and military conflicts.

Supply chain diversification can help to mitigate such risks by reducing dependency on a single source. So, even if a geopolitical disruption occurs in one region, you can still source your supplies from other regions if you have wider sourcing in your supply chain.

As a result of the US-China trade war, for example, 57% of leaders who oversee supply chain management have indicated their companies are diversifying their supply chains away from Chinese suppliers.

Reducing Reliance on a Single Source

Relying on a single supplier base or region can easily make your business vulnerable to disruptions. For instance, if a natural disaster hits China, like the crippling heat wave in August 2022, it can disrupt businesses that depend on the country, which creates roughly 28.7% of the world’s manufacturing output.

You can significantly reduce such risks by spreading your sourcing across multiple suppliers from different regions. Even if one supplier or region is disrupted, your business can still rely on other suppliers and continue to operate smoothly without any shortages.

Enhancing Competitiveness

Supply chain diversification can also help your business be more competitive by tapping into new markets and technologies. If your company sources raw materials from multiple countries, you can proactively shift sourcing as risks that arise from geopolitical actions — like the export controls China imposed on gallium and germanium in the summer of 2023.

Working with suppliers from multiple regions and gaining insights into different customer segments can also help your business develop new products and services.

Benefits of Diversified Supply Chains

In addition to gaining a competitive edge, supply chain diversification can yield several benefits for your business.

Risk Mitigation

Diversified supply chains are less vulnerable to localized disruptions, such as labor strikes, political instability and natural disasters. But this can also protect against organizational risk if your supply chain is too dependent on a single company. If a disruption occurs in one region or a major supplier, you can still source parts or raw materials from other regions.

Flexibility

Diversified supply chains can give your business more flexibility to adapt to global changes. For example, if there is a sudden increase in demand for a particular type of product or service, you can increase your production process by sourcing from multiple suppliers to meet the demands.

Innovation

Having access to a diverse range of products, technologies, and cultures can help you with the innovation of developing new products and services. This can also boost the profitability of your business, especially if you’re able to source items more cost-efficiently with strategic buys or collaborations with new vendors.

Steps for Implementing Supply Chain Diversification

Diversifying your supplier ecosystem should be a part of an overall robust supply chain risk management (SCRM) program. In particular, you can focus on these basics to help build more diversification in supply chains that power your business.

Supplier Audits

The first step in implementing supply chain diversification is to evaluate your current suppliers and identify potential alternatives. This would involve assessing the financial stability, quality standards, delivery performance, and risk profile (based on location) of your suppliers.

For example, you should consider minimizing your dependency on suppliers from high-risk countries, such as countries and economies that have a high level of corruption or political instability.

Investment in Technology

Utilizing technology can improve your supply chain resilience and help you implement your strategy for supply chain diversification more effectively. There are various automation tools that you can use to identify potential suppliers, assess their risk profile, and monitor their performance.

For example, you can use supply chain risk management software to identify and monitor the risks associated with your suppliers. You can also use supply chain visibility software to track the movements of goods and materials through your supply chain.

Continuous Review

A supply chain risk can emerge at any time, whether it’s company bankruptcy or a sudden regional conflict that escalates into warfare. It’s always good to conduct periodic reviews of your diversification strategies to make sure they’re still effective. You should also have a contingency plan in place if a new geopolitical risk emerges and you’re required to shift your sourcing toward new suppliers.

Carefully analyze your strategy and budget to make sure that you don’t end up in a tight financial position. You should also consider partnering with a third-party risk management provider to help you with the process.

How Exiger’s Technology Aids Diversification

The 1Exiger platform offers a comprehensive suite of tools that give end-to-end visibility into supply chains, so that you can quickly make decisions — with relevant, real-time data — about ways to diversify suppliers and/or mitigate risk factors, like foreign ownership, control or influence (FOCI) and modern slavery.

Technology in the platform helps you visually map supply chains and gain item-level visibility all the way to the nth tier. Exiger’s tools can illuminate critical supply chains where there are sole or limited sources of supply capacity constraints. Gaining visibility into item-level provenance leads to understanding about the source of supply and possible alternatives. It also helps distinguish between a readily available commercial off-the-shelf part and a critical, bottlenecked raw material.

Additionally, Exiger’s Proactive Intelligence is an advanced overlay on 1Exiger that incorporates regulatory mapping, firmographic data, and holistic associations across organizations and their value chains to unlock the ability to predict and prepare for supply chain events. It delivers predictive insights to inform critical business decisions, like identifying alternative suppliers.

Supply chain diversification is essential for businesses competing in today’s globalized market, and it helps boost resilience in supply chains. By building a resilient supply chain, you can reduce risk, improve sustainability and enhance your competitive capacity.

Get in touch with us to start your supply chain diversification process today.

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